Business Plan Disclosures You're Entitled to when Crowd Investing

Understanding the Business Plans of Your Crowd Investments

According to the SEC ruling, investors in crowd funded equities are entitled to disclosures about the company, the offering, and the business plan, although the disclosures are limited. 

The following is for educational purposes only and does not constitute legal nor investment advice. Educate yourself on the disclosures you are entitled to, but always seek advice from a qualified professional before making an investment decision. This is not an exhaustive analysis of the ruling, but a summary of the disclosures to provide readers with a baseline understanding of their rights to disclosure

Business Disclosures

The company is required to provide information about its business and the anticipated business plan, but no detail is provided as to the content of the business plan. Although a formal business plan isn't required, you should consider only investing in companies that provide one. The more detail about a company you have, the better position will be in to make an informed decision. If enough investors make this their practice, full business plans will become a de facto requirement regardless of regulations. Many of the elements of a business plan are included in the required disclosure documents, as well as a discussion of the material factors that make an investment in the issuer speculative or risky.

General Information about the Issuer, Officers and Directors, and Certain Shareholders

The company is required to provide its legal name, the legal status (LLC, S Corp, C corp, etc.), physical address and web address. The company also has to provide a listing of all the officers, directors, and any shareholder who owns more than 20% of the voting ownership of the company. The rule also states that those acting in those roles are also included, so a listing of the executives including vice presidents and department heads will likely be included.

Each person listed must also disclose their business experience for the previous three years. If a person is also currently employed by another organization, information about their other employer must also be disclosed. 

Description of the Business and Business Plan

This is the most vague requirement in the ruling.  The rule states the company must "disclose information about its business and business plan. The proposed rules did not specify the disclosures that an issuer would need to include in the description of the business and the business plan." Despite commenter's concerns, the SEC refused to clarify any details related to the business plan nor provide further direction to companies. The SEC believed that even a suggested list of items to include in the plan would create a de facto requirement, and would limit the flexibility for companies that the SEC was trying to maintain.

Use of Proceeds

Companies are required to provide investors with a "reasonably detailed" explanation of how they will use the invested funds in their business. Furthermore, if the company has not decided exactly how they will use the funds, the company must disclose in detail all probably uses of the funds and how the company will choose how to use the funds, including factors affecting the decision.

If a company accepts investments above its total target offering amount, the company must also file an additional similarly detailed description of how it would use funds in excess of the target funding amount.

Target Offering Amount & Deadline

Companies are required to provide for a target offering amount, the amount of money the company is intending to raise through the offering.  The company also is required to provide a deadline for the offering amount. Companies that will accept investments for more than the target offering amount must also disclose the maximum amount they are willing to accept and how the ownership shares will be redistributed based on the total amount raised.

This section also provides for protections to allow investors to cancel their intended investments, effectively pulling out of the investment. These  protections are limited, however, so it is imperative that you understand the timeline and disclosures to preserve any right you have to back out of the investment. 

Investors may cancel their investment up until 48 hours before the deadline identified in the disclosure. If the target funds are raised prior to the original deadline, investors must be informed via the platform. Five days after the announcement, a company can close the offering deadline early, locking in the investment. If there is a material change in the investment or company, an extension of the offering and a reconfirmation of the investment will be required. Absent such a material change, if you don't cancel your investment within the prescribed time period(s) your funds will automatically be transferred to the issuer.

Offering Price

The company is either required to disclose the offering price at the outset of the investment offering or provide the method of determining the offering price. If the final offering price is not set at the outset of the investment offering, the final price must be disclosed in writing prior to the sale. Investors are allowed to cancel their investment when the final offering price is disclosed.

Ownership and Capital Structure

Investors are entitled to a description of the securities being offered but also to a description of other classes of securities outstanding. This provides investors with an understanding of how their investment will fit in with the overall ownership of the company. The description should include:

  • The numbers of the securities offered and the outstanding securities
  • Voting rights and limitations on voting rights
  • How the securities may be modified, limited, or diluted
  • A summary of the differences between the classes of securities

Learn More About Crowd Investing on

Take the Purposeful Finance Challenge

In just a few minutes a week, you can move toward financial independence. Each week you will receive a simple action item to take to improve your financial situation. Visit our challenge page and commit to build your financial plan one week at a time.